H2 Prelims Paper 1 Suggested Answers

Anderson Serangoon Junior College 2022 JC2 H2 Economics Preliminary Examination Paper 1 Suggested answers Question 1: Retail troubles (a)(i) With reference to Figure 1: [1] Compare restaurant prices relative to grocery retail prices in the United States from 1960 to 2014. Restaurant prices increased by 350% relative to grocery retail prices. (ii) Using the concept of income elasticity of demand, account for the above observation. [2] • Restaurant food has YED > 1 whereas YED for grocery retail is 0 < YED <1 • Increase in income leads to increase in demand for restaurant food by more than proportionately as compared to retail food where demand increase by less than proportionately . Hence there is greater increase in price for restaurant food relative to grocery retail prices. (b) With reference to Extract 1: (i) Identify and explain the evidence that indicates the likely price elasticity of demand for food for households. [3] • Evidence: “increase in food and drink spending of nearly 7%” • Inference: Demand for food is price inelastic → PED <1 • This is because when price of food increase, expenditure would increase if quantity demanded falls less than proportionately. The increase in expenditure due to price increase is greater than the fall in expenditure due to the fall in quantity demanded, causing overall total expenditure to increase. (ii) Explain one unintended consequence of the proposed ‘UK government policies around public health and sustainability’. [2] • Rise in inequity → The poor spend a bigger proportion of their income on food than the rich. With rising prices and with nominal income unchanged, their real income falls. The poor are worse off compared to the rich. This then increases inequity. • Rise in debt → With rising costs due to having to comply with the new government regulations on public health and sustainability, firms will have lower profits and some may suffer losses , assuming no change in total revenue. Firms may resort to borrowing to finance their current ope rating costs. Thus, debt increased. • Loss of competitiveness → Rising costs due to the new government regulations will increase price of domestically produced food and drinks. This will reduce their price competitiveness as compared to imported food an d drinks, resulting in fall in demand for domestically produced food and drinks as consumers switched to imported goods. Domestic firms will suffer from losses and some may exit the industry resulting in increase in unemployment in the food and drinks industry. (c) Extract 2 states that low-cost supermarket chain Aldi ‘will never be beaten on price’. [4]

With the aid of a diagram, explain how the strategy of opening many more stores than Tesco enabled Aldi and Lidl to increase their price competitiveness. ‘Opening of many more stores’ represents expansion of the firm, which enables Aldi and Lidl to reap internal economies of sc